Let me start by saying I think that the current crisis is a failure of bank management, not of the banking system. Bank deposits below the FDIC limit are explicitly insured. Those above the limit are also explicitly covered in the case of Silicon Valley Bank (SVB) and Signature Bank – last week’s failed banks – as well as implicitly guaranteed for other regional banks by the recent actions and vows taken by the Fed, Treasury et al.
Every financial institution is reassuring their clients, which I am not sure does more to alleviate or aggravate the situation. At the risk of contributing to the aggravation, I am putting in my 2 FDIC-insured cents. I believe that sharing my views with my clients & readers adds perspective more than it solidifies the perception of a crisis.
The Achilles heel of the banking system is trust, which is a human construct, not a financial metric. Once trust is broken it is hard for the Fed and regulators to provide reassurances. Effectively, the failure of SVB, broke the trust many depositors had in their money being safe at the bank, if that bank was not one of the big ones like Chase, Wells Fargo, Bank of America, or another “too-big-to-fail” bank.
Is it rational to pull your money out of a regional bank and give it to the likes of Chase? The Fed, the FDIC and the Treasury have guaranteed all deposits, FDIC insured or not, at SVB and Signature Bank, the banks in question. Moreover, it is providing massive liquidity in the form of collateralized loans, so a troubled bank can effectively cover all withdrawal requests, should that become necessary. However, asking whether it is rational or not, is asking the wrong question, because trust is not rational. At the same time, it is the life blood of all relationships, interpersonal and economic. I think where the powers that be are missing the point is that they speak in “bank speak.” They don’t need to restore liquidity to the banking system, because it is already there. They need to restore trust. Perhaps by speaking in plain English and telling people that they don’t have to worry about their cash because it is implicitly guaranteed by the government, they could be done with this problem in short order.
I would not move my money to too-big-to-fail banks, unless you already have it there, or particularly like them. Also, this is about cash deposits at banks. This is not about investment accounts held at custodians, so your investments are not less safe today than they were a week ago, before SVB failed. Sure some custodians, like Schwab, also have a bank or are owned by a bank, but those companies are not the problem children of this crisis, and a brokerage account is a brokerage account, whether held at Schwab, a custodian owned by a bank, or at a non-bank custodian. What makes your investment account safe? SPIC insurance, which covers cash and securities held in a brokerage account. But really, what makes investors sleep well at night is knowing that their account is appropriately invested to meet their goals and appropriately diversified to prevent loss of capital, as in don’t put all your eggs in one basket.
What happened to SVB in the first place? I think there are thousands of postmortems out there, but the bottom line is, the bank was mismanaged. Ironically for all the exceptionalism that we are eager to attribute to venture tech and their service providers (SVB), they basically made an error that was as old as banking itself; no AI, high IQ, blockchain or Big Data to the rescue: a mundane case of asset and liability mismatching. They had flighty deposits (liabilities) from tech startups that were hemorrhaging cash and had matched those with long dated assets (like Treasuries with extended maturities) that precipitously fell when interest rates declined. They took a loss on those long-dated assets to shore up liquidity to meet redemptions, but it was too late: equity evaporated, trust was broken, a bank run ensued, and the rest is history. And so, a single bad management team, or ultimately a single incompetent CEO, precipitated a banking crisis.
It is also a reminder that whatever investors worry about in the moment, is different from what lies ahead. Nobody was talking about the risk of the likes of SVB a week ago. It was all about inflation and when the Fed will stop hiking. They may very well stop hiking sooner, rather than later. Perhaps that’s the silver lining.
As always, I welcome you to reach out to me with any questions or concerns.
Jan Schalkwijk, CFA